The Flinchum File

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Take a baby aspirin, and enjoy the weekend!

As I write this, it looks like the market will open about 200 points down, entirely due to the news that Dubai’s biggest company has asked for a “standstill” on almost $60 billion in debt for six months. Will this trigger the systemic heart attack that worries me? Probably not! Even if the lenders had to write-off their entire loan as worthless, which is silly to contemplate, it is only a small sliver of the total $1.5 trillion that is expected to be written off over the next two years. A more legitimate concern is that Dubai will fire-sale their other assets, driving down market prices, in order to raise cash. Most of those assets are in the UK, including a large ownership interest in the London Stock Exchange itself. However, this “chest pain” will undoubtedly reduce investors’ appetite for risk, slowing or stopping the markets rise. But, that’s OK, because the market has gotten too far ahead of the economy and needs a rest. It is even well ahead of its own 50-day-moving-average. It needs to slow down now to avoid a more disruptive drop later.

For the economic cardiologists among us, the thing to watch is not stock market closing prices, but the cost of credit default swaps. These derivatives played a large part in triggering the crash in September of last year. Unfortunately, information is hard to obtain on them. Nobody even knows how many there are. There is no central exchange to keep track of them. A mere $60 billion related to Dubai would mean nothing. But, that can be leveraged a great deal, thru derivatives called “CDOs squared”. A trillion dollars worth could easily produce the heart attack I fear. We need a central exchange NOW!

One thing is certain: The market will over-react. It has a long history of that, and it is especially true following a recession. The next few days could be ugly, but you don’t need to go the emergency room. I’ll let you know when you do!